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File lien against condo owner?

Benny L. Kass

Inman News

Updated:
Oct. 13, 2011, 9:12 p.m.

DEAR BENNY: My wife and I currently own a vacation condo in a small development on a lake in Wisconsin. There are approximately 32 units in the condo complex, of which 20 are occupied and the rest are still owned by the developer. The developer still controls the homeowners association.

Three of the occupied units are owned by one person who happens to be the original builder. He is the only person who rents out his units as vacation rentals by the week or weekend. The person who rents out the units is severely in arrears (several years) on his monthly assessments.

The rest of the condo owners are extremely unhappy with this owner who has simply refused to pay any of his assessments. His renters enjoy the full use of all of the nice amenities of our complex as he collects substantial rental income, yet he fails to pay the monthly assessments like the rest of us.

We will be filing a lien on his units to try to pressure him into paying, but we feel that will be useless unless he plans on selling. We’ve sent many nasty emails and have received only broken promises of forthcoming payment. Do you have any suggestions to help move this owner

DEAR GLEN: You indicate that the developer still controls the association? Are you sure about this? Many state condominium laws require that a developer turn over control to the owners after either a particular number of years elapse or a particular percentage of units have been sold. You should consult a real estate lawyer about this.

Yes, you should consider filing liens against the units. That’s protection if and when the units are put on the market for sale.

But even though the developer may still be in control of the association, that does not excuse him from acting irresponsibly. I presume there is a board of directors, controlled by the developer.

Case law throughout this country makes it clear that when the developer serves on such a developer-controlled board, he or she wears two hats: one as developer but also one as a member of the board of directors. In this latter capacity, that board member has a fiduciary duty to act responsibly.

I suggest that you (or preferably your attorney) send a demand letter to the developer, reminding him of this fiduciary duty. Demand that the board take immediate action to collect the delinquent assessments. This can be done either by way of a lawsuit against the owner of those units or actually attempting to foreclose against those units.

You have to review your legal documents as well as your state condominium laws, but you have rights and should pursue them immediately.

DEAR BENNY: My mother wants to sell me a house next door to hers. I do have two sisters. Anyway, my mom wants me to start paying her $400 per month for 10 years and at first wanted to go put the house in my name. She says if she should die tomorrow, the house will then be mine and I would not have to pay anything else.

Now she is telling me we could leave the house in her name and both of us sign an affidavit. I am confused on what we should do. Can you please help? --Martha

DEAR MARTHA: First, please make sure that this transaction will not create family feuds. You have two sisters; will they object if your mother gives (or sells) you the house next door? While your mother clearly has the right to do with her property as she sees fit, you don’t want to have angry siblings.

I have consistently written that it is not a good idea for parents to put their child (or children) on title to their property. There are potential tax issues involved.

Your mother has suggested you buy the house next door, by paying $48,000 (over a period of 10 years). Is this in the ballpark of market value? If not, the IRS may consider this a gift, which could trigger gift tax issues for your mother.

You should consult with a real estate attorney in your area. My suggestion: Prepare a sales contract, spelling out the terms and conditions of your purchase, and when that is signed, your mother should sign over the deed to the property to you, which should be recorded among the land records in the county where the house is located.

I do not like the idea of an “affidavit.” It could be meaningless years from now, especially if your mother decides to (1) sell the property to someone else during her lifetime, or (2) put someone else as the beneficiary of her last will and testament.

DEAR BENNY: I am 93 and own my home free and clear. I built a small apartment connected to the main house. My daughter and her husband live in the main house, and I live in the apartment. All the utilities, etc., are on one bill. We share the expenses.

In my will I have stated that my daughter will inherit the whole house. The other children agree. The deed to the house is in my name. Would it be a good idea to put the deed in my daughter’s name now or have her inherit the house? --Jeanne

DEAR JEANNE: I am impressed that you have all your faculties at the age of 93. In my opinion, it is not a good idea to put your daughter on title; she should inherit the house on your death.

Why? Let’s say you bought the property for $50,000 and it is now worth $300,000. Your basis for tax purposes (a number that is important in determining capital gains tax) is $50,000. If you give half of the property to your daughter, her basis will be $25,000. The basis of the person giving the gift (donor) becomes the basis of the gift receiver (“donee”).

If you die, and the house is then worth $300,000, and assuming no improvements were made (and ignoring selling costs such as real estate commissions), the tax basis of your child will be $175,000.

How do I get this number? On your death, your child gets a stepped-up basis as of the date of death. You die when the house is worth $300,000, and because you own half of the house in my example, your child get a stepped-up basis in the amount of $150,000. But your child also has a basis of $25,000; thus $175,000.

If the house is sold for $300,000, your child will have made a profit of $125,000 and will have to pay capital gains tax. At the current 15 percent federal tax rate, that means a payment of $18,750. Additionally, your state or local government may also impose a capital gains tax.

But if you die and your daughter inherits the house, she gets the full stepped-up basis. In our example, if the property is worth $300,000 on your death, her tax basis is $300,000. If she sells for that price, she has made no profit and thus does not have to pay any tax.

I would consult your financial adviser (and your attorney) before taking any steps with the house.